Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices

Joseph K W FUNG, Henry M.K. Mok*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.

Original languageEnglish
Pages (from-to)121-133
Number of pages13
JournalGlobal Finance Journal
Volume14
Issue number2
DOIs
Publication statusPublished - Jul 2003

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • Bid/ask quotes
  • Early unwinding
  • Hold-to-expiration
  • Options-futures parity
  • Transaction data

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